Sembcorp Industries - CIMB Research 2016-01-20: Not the right time to privatise SMM

Sembcorp Industries - CIMB Research 2016-01-20: Not the right time to privatise SMM SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries - Not the right time to privatise SMM 

  • We believe it is not the right time for SCI to take SMM private given the murky fate of Sete Brasil and the challenging offshore market. DPS cuts become more likely. 
  • Utilities needs capital for growth in India, China, Myanmar and Bangladesh. 
  • At SCI’s current price, the market is ascribing zero value to SMM. We estimate that utilities and industrial parks alone are worth S$2.47/share. 

■ Market speculation: SCI may take control of SMM 

  • It was reported in the media that SCI may inject funds into SMM or buy full control to shore up finances strained by a collapse in oil prices. SCI has previously said that SMM is a long-term investment and the group's mandate is to grow the three key businesses - utilities, marine and industrial parks. 

■ Then vs. now 

  • The uncertainty that surrounds the bankruptcy and potential impairment charges for Sete Brasil rigs could be the biggest deterrent to SCI taking SMM private for now, in our view. The current market speculation could stem from SCI’s previous attempt to take SMM private in 2002 at S$1.10/share or c. 1.6x P/BV. SMM is trading at c.1x P/BV currently. 
  • We believe SCI attempted to privatise SMM in 2002 to leverage SMM’s strong balance sheet (net cash of c.S$130m in FY02) and its venture into rig-building after its maiden 50% stake in PPL in 2001. At that time, SCI was mainly Singapore-bound and utilities had only started to grow its overseas portfolio. SCI UK (ex-Enron assets) was one of its earliest sizeable overseas (S$244m) projects acquired in 2003. 
  • As of 9M15, 60% of SCI’s utilities’ earnings were from its overseas assets that the group invested in over the past decade. We estimate utilities requires at least S$2bn in capital/project financing for its overseas pipeline, including the second India power plant – NCCPP, the Chongqing coal power plant as well as the Bangladesh and Myanmar gas power plants, all slated to be completed by 2017-18. 

■ Potential for lower DPS 

  • As of 9M15, SCI’s gross debt was S$6.2bn, comprising S$3.4bn of project finance and corporate debt and S$2.8bn from SMM. Group net debt stood at S$4.5bn (net gearing a 0.7x). We see SCI taking SMM private as a negative move as it will strain its own balance sheet and cap the growth potential of utilities. 
  • We had projected a DPS of S$0.16, based on 30% payout of its reported profit. Assuming zero dividend from SMM, we believe SCI’s FY15 DPS may be cut to S$0.11 (interim of S$0.05 and 30% payout from its divestment gain from SembSita Australia). 

■ SMM is zero value in SCI’s SOP 

  • Stripping out SMM, SCI’s utilities business is worth S$2.00/share on DCF (implied P/E of 10x CY16 or 0.8x book value) and industrial parks at S$0.47 (at book value). This translates to zero value from SMM, which we deemed as illogical. 
  • We maintain our Add call and SOP-based target price (S$3.85). Potential re-rating catalysts are stronger-than-expected earnings from utilities and partial settlement of payment from Sete Brasil in SMM.

LIM Siew Khee CIMB Securities | 2016-01-20
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